1
Debt — the grease that oils the property wheel
Okay Mouseketeers, this book is talking about money and property, so I want you to start by having a quick look in that place where you stash your cash. So take a second to grab your wallet or purse.
How much is in there? Probably somewhere between $0 and $300. A quick survey of some Facebook friends suggests the average is probably $50. (But a startling number of my mates had less than ten bucks!)
What will chump change of $50 get you? It will fill roughly half of your car's petrol tank, which might get you 300 kilometres out of Dodge. It might get you a new tie, if it's on sale. It might also get you drunk (once). But it won't do much more than that. And it definitely won't do all three. Unless you drive a Vespa, buy your ties at an op shop and are a really cheap drunk.
Clearly, it won't buy you a house.
If you bought this book because you intend to buy property, and you are staring down $50 in your wallet, then your best bet might be to play Monopoly — and fantasise about global domination and making millions.
Or you could track down 13 000 of your closest mates, con them into giving you the $50 in their wallets, and then you could purchase the average Australian house. Got that many mates? You'd have to hold a house-warming with more beer than the fraternity in National Lampoon's Animal House to pay them all back.
True, our wallets aren't where we keep most of our cash these days. We're not yet the cashless society predicted a few decades ago, but most of our money sits in bank accounts, where it enters and departs largely electronically. Depressingly, many people have more money in their wallets than they do in their bank accounts.
Since you're reading this book, one thing is certain: you don't intend to let a little problem like a current lack of savings stop you from achieving the ‘Great Australian Dream'. No chance.
So you want to buy a property. Is it a home or an investment property you've got your eye on?
Well, I hope this news isn't going to be too disappointing for you, but you can't buy property with cash. Not with your cash, anyway. Not what's in your wallet. Not what's in your bank account. Not even if you were to max out a cash withdrawal from your credit card.
Short of winning the lotto, or having a childless aunty die and leave you her millions, you will never have enough cash in your wallet, or the bank, to be able to buy a home or an investment property.
You can't save your way to a home
I've seen friends try to save their way to buying a home. Well, that's what they seemed to be doing. They saved and saved, for year after year. The more money they saved, the higher house prices went and the bigger the place they wanted as their first home.
They ended up with the biggest deposit I've ever personally known — about a quarter of a million dollars — which had taken them about ten years to save. But over that decade, what they wanted as a home had grown from around $300 000 to about a million bucks.
Yep, had they bought the same home when they had a deposit of $50 000 or $100 000, they probably would have had a mortgage of $270 000 (with a $50 000 deposit), instead of about $800 000 (with a $250 000 deposit).
Simply, you can't save yourself all the way to owning a home. You want to buy property? You are going to need help. You're going to need other people's money. That, dear readers, is going to involve borrowing money.
And assistance on that front would be the point of this book.
Property and borrowing go hand in hand, even more so than love and marriage in Frank Sinatra's classic song of the same name (synonymous for a certain generation with Al and Peg Bundy in Married … With Children).
Property comes with debt. Lots of it. It's generally going to be multiples of the combined annual income of you and your partner. For property virgins, it's a total freak-out mountain of debt. Signing up for your first home loan is usually more gut-churning than walking down the aisle, anticipating your HSC results and watching an all-night marathon of Freddy Krueger movies.
Well, it tends to be that scary and come with that level of debt in the beginning at least.
Not helping those fears is the bad-arse reputation that debt comes with, at least part of which is not deserved. (A bit like Ozzy Osbourne. Yes, he bit the head off a bat at a concert in 1982. But no, he didn't realise it was a real bat — he thought it was made from rubber.)
If you think debt is a dirty four-letter word, then you need to stop, take a minute and make a decision. Debt is a tool. And unless you're going to save here in Australia and then go and buy in a third-world country, you and debt are going to have to get acquainted.
So, you either need to (a) get over it and accept that property and debt go together like Vegemite and toast, or (b) put down this book and continue renting forever.
The point of Mortgages Made Easy is not to try to convince you to take on debt — the reality is you have no choice if you want to own property. The point of this book is to show you how to best make mortgages work for you in your goal of wealth creation via property.
There is no such thing as ‘the perfect mortgage'. Some mortgages will suit you. Others won't. The point about mortgage debt is to find a package or solution that works well for you. To do that, you need to understand what mortgages are and how they can and can't be used to make your dream of property ownership and wealth creation a reality.
But before we go on, there is something critical that I need you to understand, which is so often misunderstood by people looking at property for the first time.
Homes versus investment properties
At its most basic, property ownership has two forms. There's owning a property for you to live in (a home). And then there's owning a property for someone else to live in (an investment property). They are both real estate. They can look exactly the same — even be next door to each other.
But they are very, very different. And never the twain should meet.
I go into more detail about this in chapter 2. But for now, understand that they are worlds apart. One you will live in; the other you won't. The base reason for buying them should be very different. They are total opposites when it comes to tax. The way you should view them as purchases is different. The way you should spend money on them is different.
We will make the distinction between home and investment property throughout Mortgages Made Easy, while property and real estate could mean either homes or investment properties.
So why did you pick up this book?
I'm assuming you want one of the two — either a home or an investment property. You might even be thinking ahead and wanting to buy both! Fantastic! I'm a card-carrying nut for property both as homes and investments — this is my sixth book that covers property in one dimension or another — so there will also be plenty of tips on purchasing property in this book.
But the main aim of this book is to explain how to make mortgages and banks work best for you in improving your future wealth through property.
I want you, through reading this book, to gain the confidence to take on debt on your terms and in a way that will help you own your home sooner, or build your wealth via your property portfolio faster. (Or, if you still need help, I will show you how professional mortgage brokers could assist.)
It is crucial to get the debt part of property right. If you do get it right, you can potentially own your home years sooner, or make your investment property work thousands of dollars a year better for you.
If you came looking to buy a home, great. Buying your own home is the cornerstone of wealth creation (and we go into more detail on this in chapter 5). People who buy their own home generally end up wealthier than those who rent their whole lives. Getting started might seem hard and the mortgage mountain might seem like a painful hill to climb. I get that. But, like everything in life, including your finances, it's a case of ‘no pain, no gain'. There has to be some sacrifice.
If it's investmen...
